Treasury Proposal Casts Wide Net on State Tax Credits

One of the more high profile changes found in the December 2017 Tax Bill was the $10,000 deduction cap on State and Local Taxes (otherwise known as SALT), prompting a huge outcry from politicians in high tax states like New Jersey, New York and Connecticut who wanted to preserve the popular benefit . As a counter measure, those states implemented programs that that converts state tax payments to charitable contributions (the deductions for which are not limited in the new tax law) while also allowing for a state tax credit. Last week, the Treasury Department proposed steps to block what they consider circumvention of the new tax law by eliminating the Federal Tax Deduction of these contributions.

Of major concern is the effect this decision will have on over a dozen states with long established (and hugely popular) programs, most of which provide private school scholarships for students with financial needs. States such as Georgia, Alabama, Florida and South Carolina (to name a few) tend to reach their statewide caps within a few days of the new calendar year and have consistently withstood IRS scrutiny. Yet, they are expected to face collateral damage as Treasury takes aim at those higher tax states they feel to be reacting to the new tax law. At this point, states with pre-existing programs are not expected to be spared.

What are the ramifications to taxpayers? Those who have taken advantage existing programs face a loss of a federal tax deduction and increased tax liability. For many, the 2018 contributions have been made, and if so, they should confer with their tax professionals about possible adjustments to their year-end tax planning.

Friday’s move by the Treasury initiates a 45 day comment period, and we will follow with an update once a decision has been made.